Transcript Gissurarson Slides 9 April 2013

Making the Invisible Hand Visible:
Reflections on the Political Economy of Freedom
Professor Hannes H. Gissurarson
Porto Alegre 9 April 2013
Role of Political Economy
• To make the invisible hand visible, in other
words to explain:
1. How one man’s gain needn’t be another
man’s loss
2. How order can emerge without anyone
issuing orders; spontaneous coordination
• Also to explain the state, especially
unintended consequences of government
actions
Parable of Good Samaritan
• Four overlooked lessons from the parable:
• We need government to protect us from
highwaymen
• We cannot trust the intellectuals, the priest
and the Levite
• The Samaritan was a man of means; he could
afford to help
• He did good at his own expense, not that of
his neighbours
Nature of the State
• Hegel: State is “March of God through History”
• Totalitarian 20th Century: “March of the Devil
through History”
• The fantasy of the benevolent despot
• Process, not end-of-state: power tends to
corrupt, and absolute power corrupts absolutely
• Process: people react to costs, produce less or
more, depending on system
Invisible Victims of Totalitarian State
Number of Victims
German Nazis
Other communists
Other Asian communists
Chinese communists
Russian communists
0
10
20
30
40
50
60
70
37 Million Soldiers Killed in Wars
The Big News: 21st Century Capitalism
• Not the financial crisis since 2008
• The big news: BRIC countries, comprising
almost half the earth’s population, joined the
world economy, participating in international
capitalism
• With economic growth, hundreds of millions
migrating into middle class
• Economic freedom has on average not
decreased, after a rapid earlier increase
News of Capitalism’s Death
Exaggerated
7
6.8
6.6
6.4
6.2
Index of Economic
Freedom: World Average
6
5.8
5.6
5.4
5.2
1980
1985
1990
2000
2005
2010
Economic Freedom in the BRICs
7
6.5
6
Brazil
5.5
Russia
5
India
China
4.5
4
3.5
1970 1975 1980 1985 1990 1995 2000 2005 2009
The Four Chinese Economies 2011
GDP/capita $
China
EU
Taiwan
US
Hong Kong
Singapore
0
10000
20000
30000
40000
50000
60000
70000
Seven Nordic economies 2010
GDP/capita $
Finland
Denmark
Iceland
Sweden
Manitoba
South Dakota
Minnesota
0
10000
20000
30000
40000
50000
60000
Swedes in Different Economies
GDP/capita 2008 $
Swedish-Americans
Average US
Swedes in Sweden
0
10000
20000
30000
40000
50000
60000
Capitalism still alive and kicking!
• International financial crisis reminded us that
capitalism is subject to fluctuations, such as credit
bubbles which inevitably burst
• But so is government: Lenin, Stalin, Hitler, Mao
turned lives upside down
• Government made matter worse: subprime loans
in US; low interest rates in US; Basel rules
underestimating risks from mortgages and
government bonds
• New financial techniques obscuring risks instead
of spreading them
Moral Hazard of Banking
What is Unseen about Tax Revenue
• Tax revenue does not necessarily increase
with the tax rate (Laffer Curve)
• With higher tax rates, people work less, switch
over to untaxed activities, flee into the
underground economy, invest less
• By over-taxing, government loses revenue
• Switzerland and Sweden: almost same tax
revenue per capita, but different tax rates
Laffer Curve: Useful Simplification
Tax Revenue in $ by Tax Rate in %
Tax Revenue
in $
0
10
20
30
40
50
60
70
80
90
100
Switzerland, Sweden: Laffer Curve
Tax Revenue per capita in $
30000
Sweden
25000
Switzerland
20000
15000
10000
5000
0
0
20
40
60
Tax Rate % of GDP
80
100
Will to Work Depends on Tax Rates
Weekly average work hours 2005
27
26
25
24
23
22
21
20
19
18
Japan
Iceland
Canada
Portugal Australia
US
UK
Italy
Germany
France
0.4
0.45
0.5
0.55
Average Marginal Tax Rate
0.6
0.65
More Revenue with Lower Rate
55
1.3
50
1.2
45
1.1
40
Corporate Tax
35
Rate
30
1.0
0.9
Corporate Tax
Revenue % of
GDP
25
0.8
20
15
0.7
1990
Corporate Tax Rate
1995
2000
2003
Corporate Tax Revenue % of GDP
What is Unseen in Progressive Tax
• Sound philosophical and economic arguments
against progressive incomes tax
• Not a tax on being rich, but on becoming rich
• With flat tax, the rich contribute more $: 36% of
high income more than on low income
• Net tax = Gross tax – Public services and transfers
• Since public transfers and services more or less
equal for all, net flat incomes tax indeed
progressive (higher proportion paid by rich)
Flat Incomes Tax: Net and Gross
Net Tax Payment by Different Monthly Income
250
200
150
Tax Payment from
Individual
100
Public services and
Transfers to Individual
50
0
0
-50
100
200
300
400
500
Monthly Income $
600
700
Net Flat Incomes Tax Is Progressive
Net Tax Burden %
25
20
15
10
5
0
300
-5
375
450
525
600
Monthly Income $
675
750
Tax Rates, the Rich, and Revenue
1980
• In 1980, there were 116,800
rich people in the US
• Those rich people reported
$36.2 billion of income to
the IRS
• They paid $19.0 billion of
income tax to the federal
government
1988
• By 1988, there were
723,700 rich people
• Those rich people reported
$353.0 billion of income to
the IRS
• They paid $99.7 billion of
income tax to the federal
government
More Rich People, Higher Revenue
Number of Rich (Left Axis)
Tax Revenue from Rich in Billions of $ (Right Axis)
800000
120
700000
100
600000
80
500000
400000
60
300000
40
200000
20
100000
0
0
1980
1988
Distribution of Tax Burden, US 2000
Proportion of Total Tax Payments
Highest Quintile
Next-highest Quintile
Mid-Quintile
Next-lowest Quintile
Lowest Quintile
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
The Unseen Challenge
Proportion of Gross International Product
30
25
20
EU
US
15
China and India
10
Brazil
5
0
1992
1996
2000
2004
2008
2012
2016
Parting Ways: Australia and Argentina
30000
GDP/capita $
25000
20000
Australia
15000
Argentina
10000
5000
0
1929
1939
1949
1959
1969
1979
1989
1999
Slow Growth, Low Income
Economic Growth
5%
14
4%
18
3%
How many years needed
for income to double, by
different rates of
economic growth
23
2%
35
1%
70
0
20
40
Years
60
80
Maximize Growth, not Revenue
Tax Revenues in $ by Tax Rates in %
Maximum Tax Revenue
Most Efficient
Tax Rate
Tax Revenue
in $
0
10
20
30
40
50
60
70
80
90
100
Final comments
• Was the revival of economic freedom a return
to the pre-1914 world?
• Two causes for optimism: new technology
repeatedly proves pessimists wrong; more
world trade, with the BRICs, creates wealth
• Two causes for pessimism: the pre-1914 world
did’nt have extensive welfare obligations (to
those who do not create or contribute), and it
had sound money, based on the gold standard